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Many new entrants in this exciting
world of Options trading do get attracted to traders who have made huge profits
by buying that right option at the right time or those who have been making
consistent profits by selling that right option at the right time.One of the
most widely debated issues in options trading has been what pays off more - Net
Buying of Options or Net Selling of Options. Well, almost two decades of
history of Indian options trading has taught us: 'It Depends!
Depends on what?
Three major conditions help us choose if a
Buy Option will be a better bet or a Sell Option. Before we see that,
for Selling Options one is required to be skilled enough to understand the
unlimited risk profile of it and know how to handle it just in case it goes
wrong.
First Condition: Time
We all know options keeps losing a part
of its premium due to passage of time. However, the time value loss on the
option premium is not constant. The nature of
time value loss from option premium is slow in the beginning of the expiry and
picks up speed as it comes closer to the expiry and is at a great speed in the
last few sessions of expiry.
Implied Volatility
Implied Volatility in plain English is
the expensiveness of the option. A figure easily available in many free tools
on the internet. It is the expected that volatility figure obtained from the
premium of the option.
Implied volatility also has its own
characteristic, it broadly moves in a range. Here, instead of sharing what to
do, let me share what not to do.But, before that, there is an index of Implied
volatility of Nifty options called India VIX. The value of this index is
publicly available. If VIX is observed close to a recent high, it is
advisable not to Buy options.One the other hand, if we have the same index is
close to recent lows, it is advisable not to Sell options. There are certain
theories that do guide Selling options when Implied Volatility is at higher
extreme and Buying when its otherwise. However, finding these extremes is a
separate topic of discussion itself.
